When choosing mutual funds, few aspects are within
investors' control. Future performance isn't one of them. But
expenses, risk, manager tenure and tax-efficiency are qualities that
can be judged before you buy.

Index funds, which track a basket of stocks, are generally low-cost
options intended to provide market-like returns. Active management,
in contrast, relies on a professional's stock-picking in an effort
to beat a market benchmark.

Here are the major pitfalls that can trip you up with mutual funds:

• Paying too much: It can't be said enough: with
funds, costs matter. Annual expenses eat into total return, year
after year. With high-cost funds, you pay more and pocket less.
Moreover, studies show that low-expense funds are more likely to
outperform their costlier counterparts over time.

• Taking excessive risk: Funds with great multiyear
track records may look attractive, but you need to know just how
those returns were generated. Check the fund's annualized results
for unusual highs and lows. Then compare those figures with its
category peers.

• Portfolio overlap: Don't be a fund collector.
Copycat funds bloat your investment portfolio and drag down
performance. At some point, the blend will produce bland, index-like
results at a high cost. Plus, heavier concentration in a few stocks
adds risk.

• Recent manager changes: A fund's performance
doesn't always speak for itself. Funds are ranked, rated and
rewarded on the strength of returns over several years. But if a
manager is new, those results are no longer a litmus test.

• Investment strategy drift: A burst of trading
activity, venturing into new market sectors, adding larger-cap
stocks, taking an aggressive stance in a volatile market -- these
are all telltale signs that a fund has changed its investment
strategy, and not always for the better.

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